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Moody’s Downgrade 11 August 2017

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Moody’s Downgrades Namibia to Sub-Investment Grade

On Friday 11 August Moody’s Investors Service downgraded Namibia from Baa3 to Ba1, sub-investment grade. While the timing was unexpected, the downgrade was not. At the start of the year we voiced our concern that Namibia would lose its investment grade rating. We thus concur with the reasoning behind the ratings downgrade. The points raised are reflective of the facts and we trust that Namibians will view this through a constructive lens.

Moody’s statement can be found here: https://www.moodys.com/research/Moodys-Downgrades-Namibias-rating-to-Ba1-maintains-negative-outlook–PR_370993

Factors contributing to the downgrade:

1. Erosion of Namibia’s fiscal strength due to sizeable fiscal imbalances and an increasing debt burden

We agree with this point. Debt issuance over the past two years has been substantial. Debt to GDP has gone from just over 26% in June 2015 to 41.9% at present (MoF numbers). Add in the portion of the African Development Bank loan received already and this goes up further. This debt was raised partially to fund government expenditure and partially to support the external position of the country. Effectively government’s leveraged balance sheet makes it more difficult to secure further financing should it be needed in the event of any shock to the economy.

2. Limited institutional capacity to manage shocks and address long-term structural fiscal rigidities

Agree. The argument posted by Moody’s is very clear here. Examples of the erosion of fiscal strength are provided and spot on. Budget deficits in 2015/16 and 2016/17 were larger than expected due to overoptimistic revenue forecasts which did not materialise. The consumptive, recurrent portion of the budget continued to grow during these years, while the development budget shrunk. The wage bill is given as an example of this recurrent expenditure. This recurrent expenditure is very difficult to reduce in many cases and thus limits discretionary expenditure such as infrastructure projects when revenue collection is under pressure as it is now. Limited spending on necessary infrastructure projects acts as a drag on growth as pointed out by the ratings agency.

3. Risk of renewed government liquidity pressures in the coming years

Agree. Should revenue again disappoint and debt issuance increase in order to fund larger than expected deficits, we could see liquidity dry up in the same way as it did in 2016.

Thus we agree with the points made by Moody’s. Structural changes need to be made to government’s expenditure profile in order to return the public budget to a sustainable path. The minister of finance made a good point that this process will take time and that government has started and is committed to making the necessary changes.

Moody’s has to provide accurate and timely information to its clients (holders of debt – government and corporate – this includes almost everyone with a pension in Namibia) and thus has to act on what is happening in the present with a view on how this will affect the financial stability of the country and government’s ability to honour its debt obligations. The downgrade was therefore inevitable as initial efforts to drive structural changes have not been immediately evident. Indeed, the opposite has been witnessed as government has struggled to pay outstanding invoices to the private sector. The inability to pay invoices is what would have been most concerning to Moody’s as it brings into question the ability of government to honour its debt obligations. Much of these invoices have been settled as government has pointed out, but there was a substantial delay in satisfying many of these obligations, which is concerning.

We are cognisant of the fiscal measures implemented by government thus far and expect to see further commitment to these in the mid-term budget review scheduled for October. The Moody’s downgrade should not be seen as a failure of government but rather a warning to correct course after slowly straying from a sustainable path for the better part of a decade. For the man on the street the Moody’s downgrade should have little impact if the correct policy decisions are made going forward. Structural changes to the fiscal budget will not be easy to effect but are vital if Namibia is to return to a path where sustainable social and economic progress is made.

Fitch Revises Namibia’s Outlook to Negative; Affirms at ‘BBB-‘

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The below press release is from the Fitch Ratings website:

Fitch Ratings-London-02 September 2016: Fitch Ratings has revised Namibia’s Outlooks to Negative from Stable while affirming the Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at ‘BBB-‘. The issue ratings on Namibia’s senior unsecured foreign- and local-currency bonds are also affirmed at ‘BBB-‘. The Country Ceiling is affirmed at ‘BBB’ and the Short-Term Foreign and Local Currency IDRs at ‘F3’.

Fitch has also revised the Outlook on Namibia’s National Rating on the South African scale to Negative from Stable and affirmed the Long-Term rating at ‘AA+(zaf)’. The issue ratings on Namibia’s bonds with a National rating have been affirmed at ‘AA+(zaf)’.

The revision of Outlook to Negative reflects the following key rating drivers and their relative strength:

HIGH

Namibia’s budget deficit widened sharply to 8.3% of GDP in fiscal year 2015/16 (FY15, which runs from April 2015), well above the government’s 5% target and the worst on record. The deficit has worsened progressively from 0.1% in FY12 to 3.4% in FY13 and 6.4% in FY14, and is well above the ‘BBB’ category median of 2.7%. The overshoot in the deficit in FY15 primarily reflected weaker-than-expected revenues from domestic sources, including company tax and lower-than-expected income tax.

The government is targeting a narrowing of the deficit to 4.3% of GDP in FY16. Outturns for the first few months of the current fiscal year indicate revenue has grown strongly. The Ministry of Finance is exerting greater control over expenditure at all ministries and is cutting overtime, travel and capital spending. However, meeting deficit targets will prove challenging, particularly amid a secular decline in revenues from the Southern African Customs Union (SACU), which the government projects will fall under 7% of GDP by 2018 from 12.4% in 2014.

MEDIUM

Gross general government debt (GGGD) increased sharply to 38.2% of GDP at end-2015 from 23.2% at end-2014, albeit partly due to an increase in government deposits following the issue of a USD750m Eurobond and exchange rate depreciation. Fitch forecasts GGGD to rise further to 39% of GDP at end-2016. It is now roughly in line with the peer median of 41%, having previously been a rating strength. We expect government guarantees to peak at 5.8% of GDP in FY16, below the government’s 10% limit.

Namibia’s current account deficit deteriorated to 14.1% of GDP in 2015, from 8.9% in 2013, and well above the ‘BBB’ category median of 1.3%. However, much of the deficit has been financed by external borrowing from parent mining companies, reducing external vulnerabilities.

Merchandise exports should start to grow in the coming years as big mining projects come online. Moreover, imports should fall as capital goods demand decreases (data for 1H16 already show a slowdown in all import categories). Fitch expects the current account deficit to narrow to 6.9% of GDP by 2018. Foreign exchange reserves increased to around 3.4 months of import cover by mid-2016, although this is still below the peer median of 5.7%.
KEY RATING DRIVERS
Namibia’s ‘BBB-‘ ratings also reflect the following factors:

Growth performance remains a key rating strength. The economy grew 5.7% in 2015, and Fitch expects it to expand 4.4% this year (BBB median five-year average: 2.5%). New mining capacity is rapidly coming online, notably the Husab uranium mine, which is expected to begin production by end-2016, and is expected to add around 5% to GDP. The continued strong growth performance is particularly impressive given the continued drought, weak performance in key trading partners (notably South Africa and Angola) and higher interest rates.

A major reform, the New Equitable Economic Empowerment Framework (NEEEF), was announced by the President at the beginning of the year and seeks to increase the involvement of previously disadvantaged citizens in the private sector. While lacking in details, it is likely that the law will be approved by parliament (although the Supreme Court might end up blocking it). This has caused some unease in the business community and could slow down foreign investment in manufacturing and services.

The rapid growth in house prices in recent years has created certain risks for the banking sector. However, given the introduction of macro prudential measures and falling demand from Angola, it is likely that the housing market will cool from here, with a slowdown at the top end of the market already visible. Asset quality is fairly good, with non-performing loans (NPLs) at around 1.6% of total loans at end-2015. The system’s capital position is sound, with a risk- weighted capital ratio of 14.3% in December 2015.

Namibia’s ratings are supported by a track record of political stability, slightly stronger governance indicators than rated peers, a net external creditor position, financing flexibility enhanced by access to the deep South African capital markets and a liquid banking system. However, it has a fairly low level of GDP per capita and economic development, high unemployment and inequality, and is vulnerable to shocks to commodity prices.

SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO)
Fitch’s proprietary SRM assigns Namibia a score equivalent to a rating of ‘BB+’ on the Long-Term Foreign Currency IDR scale.

Fitch’s sovereign rating committee adjusted the output from the SRM to arrive at the final Long-Term Foreign Currency IDR by applying its QO, relative to rated peers, as follows:
Macro: +1 notch, to reflect strong medium-term growth potential and credible macroeconomic policies consistent with its exchange rate regime.

RATING SENSITIVITIES
Future developments that could result in a downgrade include:
– A failure to narrow the fiscal deficit leading to continued rise in the government debt/GDP ratio.
– Failure to narrow the current account deficit or significant drawdown in international reserves.
– Deterioration in economic growth, for example, due to a worsening of the business environment.

Future Developments that could result in the Outlook being revised to Stable include:
– A narrowing of the budget deficit consistent with a stabilisation of the government debt/GDP ratio.
-A marked improvement in the current account balance and increase in foreign exchange reserves.

KEY ASSUMPTIONS
Fitch assumes that the currency peg agreement with South Africa will remain in place and the government will pursue prudent macroeconomic policies consistent with it.

Global assumptions are consistent with Fitch’s ‘Global Economic Outlook,’ including a subdued outlook for commodity prices.

 

Final National Accounts, 2014

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The Namibia Statistics Agency has just released the final national accounts for 2014. As per our expectations, we have seen a major upward revision in the overall real growth rate, from 4.5% to 6.4%, slightly below our forecast of 6.8%. This revision brings both the overall growth level more in line with levels seen in high frequency indicators through the year, as well as showing notable improvement in many of the sectors growth levels, bringing these more in line with growth witnessed on the ground.

Some of the key revisions to the supply side tables (real GDP) are noted below.

NamGrowth

REalGDP GrowthGDP2014IJGvsNARealGDPGrowth

We also note that we have seen a sizable revision to the deflator between the nominal and real GDP figures. The peculiarly high deflator in the preliminary accounts was of some concern to us, as we believed it was artificially large, and dampening the real GDP growth picture. The new and previous deflators, relative to NCPI, can be seen below.

NAmDeflator

We are currently working on a National Accounts review, and will share more thoughts on the current release in due course.